U.S. companies rich in intellectual property are looking at a new tax-friendly regime: the U.S.

A provision in the newly revised U.S. tax code slashes the income tax companies pay on royalties from the overseas use of intellectual property or so-called intangible assets, such as licenses and patents.

The new tax break, for what is dubbed foreign-derived intangible income, effectively reduces tax on foreign income from goods and services produced in the U.S. using patents and other intellectual property to 13.125% until the end of 2025, after which the rate rises to 16.4%. Previously, royalties paid to a unit in the U.S. would have been taxed similarly to other U.S. income, for which the top corporate tax rate was 35%. The new headline corporate rate is 21%.

The deduction is meant to induce companies with large U.S. operations and significant foreign income from patent royalties to base more of those assets in the U.S. Such companies, especially in technology and pharmaceutical sectors, often hold foreign rights for their IP in a company based in a low-tax country.

The Double Irish is a structure that allows companies to reduce taxable income by setting up two entities—an Irish-registered parent based in a tax haven such as Bermuda that houses a company’s foreign IP rights, and an Irish subsidiary, which licenses the IP and pays royalties in turn. Since Ireland doesn’t tax the royalties paid, the company’s tax bill is effectively reduced.

The structure was particularly attractive to U.S. companies, which could also stockpile foreign profits abroad without paying U.S. taxes—something they may no longer be able to do under the new code because it includes a set of minimum taxes on foreign income. Tax advisers estimate that hundreds of companies have used the Double Irish to move tens of billions of dollars a year to low- or no-tax jurisdictions.

The Google unit in Ireland that sells ads across Europe, for instance, has paid tens of billions of euros in royalty fees for the use of Google’s intellectual property to a unit in the Netherlands that then pays nearly all those fees to an Irish company that is managed in Bermuda, where there is no corporate income tax, according to corporate filings in the Netherlands and Ireland. In 2016, Google’s Dutch entity reported paying nearly €16 billion ($19.6 billion) to that unit, filings show.

Spokesmen for Google and Facebook declined to comment. Both companies previously have said they pay all taxes that they owe. An Allergan spokesman said the firm is committed to investing both in the U.S. and its operations in Ireland.

Taxing the Intellect

A shakeup in global tax treaties and laws is forcing companies to rethink where they house intellectual property (IP)—and pay royalties. Here are some top places they’re considering:

Corporate income tax rates, by country

Ireland

12.5%

IP tax break: Companies can deduct the cost to acquire a variety of IP assets and amortize them to offset profits.

Luxembourg

18%*

Some income from software and IP is 80% tax exempt if Luxembourg unit funded R&D.

U.K.

19%

Some income from patents or patented products derived from UK activities is taxable at 10%.

Refunds available for five sevenths of corporate tax on royalty income.

*15% for companies with taxable profit under €25,000 †20% for income under €200,000Sources: the governments (corporate tax rates); PwC, Deloitte, KPMG, Dutch government (IP tax breaks)

In recent years, pressure from countries in Europe and the Organization for Economic Cooperation and Development, a group of rich nations, has led to an update of tax rules that generally requires companies to keep their IP in places where they have substantial operations. That has led countries, including Ireland, to close loopholes that allowed structures like the Double Irish to exist and has set off a race among companies to find a new home for their IP.

For companies that produce much of their intellectual property on American soil, the U.S. is now an option, advisers say.

“Now the U.S. has to enter your consideration, absolutely,” said Anna Scally, head of the tech and media practice in Ireland for accounting firm KPMG. She added that firms are currently crunching numbers to find the best alternative locales that comply with tax rules. “It’s not a slam dunk,” Ms. Scally said of the U.S. “But it is an option.”

Among the options for companies are locales such as Malta, which despite a high headline corporate tax rate gives significant tax breaks, including for royalties, and has a tax treaty with Ireland that would allow an Irish-registered company to be managed there after 2020, similar to the Double Irish, according to tax advisers. In a report last fall, the charity Christian Aid Ireland, which says it fights against tax injustice, dubbed the structure the “Single Malt.”

Other options include the U.K., the Netherlands and Luxembourg, which have enacted special low-tax regimes for some IP income, in the range of 10% to 15%. Advisers say Ireland remains a leading option even without the Double Irish because its corporate tax rate is 12.5% and many tech companies already have a large presence in that country.

The U.S.’s elevation as a tax-efficient locale may face challenges from other countries that claim the new foreign-derived tax deduction is an unfair trade subsidy, tax advisers say. Also, the effective FDII rate is set to rise to 16.4% in 2025—without taking into account additional U.S. state taxes—and could make the break less attractive.

The possibility of a political reversal has also made businesses more cautious, experts say.

“I don’t think any firm would be well served by betting the ranch on the stability of the new tax law,” said Edward Kleinbard, a former U.S. tax official who is now a tax professor at the University of Southern California law school.

U.S. companies are holding more than $2.6 trillion in profits across the globe and they haven't paid U.S. taxes on it. Why is so much money offshore, and how could the tax code be changed to bring it back? WSJ's tax reporter Richard Rubin dives in. Photo: Heather Seidel/The Wall Street Journal